The Bernanke critics are wrong ?

The answer is “yes”, that is if you read today’s main article on Bloomberg. The main story line being : “The criticism about the FED being inflationary is not fact-based. Unemployment is slightly improving but far from inflationary levels. And though several republican presidential candidates are claiming Mr Bernanke is the most powerful, inflationary and dangerous chairman in the history of central banking, in terms of an inflation record, the plain facts are that the FED has been as close to impeccable as you can possibly get”.

Well, not really because I have some considerations to make. What has the FED done/achieved and why has the so-called inflationary bias not yet materialized into the real world ?

First of all, it did have an impact in the real world. On the pros of operation twist and QE1 and 2, we have seen that already cash rich companies have taken up the opportunity to launch longer term maturities to secure long term funding and to profit from decreasing spreads in a world gung-ho for yield. And successfully so. For example, Procter recently launched a 10y USD benchmark loan @ 2,30%, IBM a 5 year tranche @ 0,55% and McDonalds a 30 year tranche with a coupon of 3,70%( !!!). And the Walhalla is not restricted to US companies, also emerging markets are profiting from Ben’s printing machine. For example, Brazil’s Petrobras launched 7 bio USD start of February of new bonds on various maturities @ record low yields.

Now what about the absence of inflationary effects ? First of all, about the real world non-effects I would be very careful to confirm. People tend to look at the core inflation numbers (1,8% and declining) but forget to mention a thing or two : Next to the discussion of core inflation, the index itself is very much influenced by housing cost and shelter (35% weight). In view of depressing home prices, it doesn’t really come as a surprise that the core number comes in fairly low. Looking at headline inflation – and they are about to change the calculation again !! – we have witnessed a different picture. Throughout 2011, inflation ran at 3%. This is not terribly exaggerated but far from being deflationary either.

But there are other remarks to be made. The FED brought interest rates close to the 0 range bound and bought a mass amount of US government bonds from banks. Did it trigger a money multiplier acceleration ? For example, through banking activity resumption serving Joe six-pack ? No, in fact, most of the money went back to sender being the FED. So it didn’t trigger inflation ? To answer that particular question, one has to look at various asset classes and the USD. And then you come to a different outcome. And here again, Ben’s printing machine goes global. It had a strong impact on commodity prices, on equity markets world-wide but most of all, and that is my main preoccupation, on the role of the greenback. The USD, the so-called anchor of safety and stability, has been performing a different role and this since 2008 : Where we used to have a JPY to perform this function, we now have a bigger source of funding for carry trades. Which means that leverage in pure asset markets is back, going into commodities, equities and emerging markets (bonds and equities), all this sponsored by the FED’s free USD. And if this continues, global asset inflation will have an inflationary effect into the real world through wealth portfolio effects. If it turns out wrong, be prepared for some huge volatility on USD cross exchange rates because a lot of people will arrive too late at a too narrow exit. May be for some it’s about time to put on those Nike’s.